Insurance Law News - April 2010

• Failure to Answer Questions at EUO and to Submit Complete Proof of Loss Defeats Insured’s Suit
• Defending Under One Policy Does Not Insulate Insurer from Liability for Alleged Breach of Duty to Defend / Settle Under Second Policy
• Even If Insured Business Was Operating at Net Loss Greater than Operating Costs at Time of Loss, Business Interruption Benefits for Continuing Normal Operating Expenses Are Not Reduced by Net Loss
• Subhaulers Are Not “Insureds” Under Trucker’s Commercial Auto Policy Providing “Hired Auto” Coverage

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Failure to Answer Questions at EUO and to Submit Complete Proof of Loss Defeats Insured’s Suit

An insured’s failure to answer questions at an examination under oath (even on advice of counsel), combined with failure to submit a complete and supported proof of loss form, defeated the insured’s suit for breach of contract and bad faith. (Abdelhamid v. Fire Ins. Exchange (2010) 182 Cal.App.4th 990)

Facts

Zary Abdelhamid purchased a house. Thereafter, she purchased a homeowner’s insurance policy from Fire Insurance Exchange (FIE). A fire damaged Abdelhamid’s house, and a subsequent investigation revealed the fire was intentionally set. In addition, investigation revealed a number of circumstances that suggested Abdelhamid herself might have been responsible for starting the fire.

In particular, FIE uncovered information that Abdelhamid: (1) believed the seller had defrauded Abdelhamid into paying too much for the residence; (2) had been forced to carry three mortgages, amounting to sizeable monthly payments, for the five or six months prior to the fire; (3) had paid a large sum of money upfront to contractors for a remodel job that the building department ultimately halted because of failure to obtain permits; and (4) had been unable to get the contractors to complete the remodel or return her money.

FIE also learned Abdelhamid had filed bankruptcy a few years before the fire. At the time she filed the bankruptcy, she had sizeable debt and minimal income. In addition, Abdelhamid’s sole source of claimed income at the time of the fire was a restaurant she recently had opened.

FIE requested Abdelhamid to submit a completed proof of loss form, produce various categories of documentation and appear for an examination under oath (EUO). Abdelhamid, working with a public adjuster, submitted a proof of loss to FIE. The proof of loss claimed a building loss in the amount of $459,000 and listed losses for contents, separate structures and additional living expenses in amounts “to be determined.” The proof of loss failed to state where Abdelhamid was residing at the time of the claimed loss, and the proof of loss did not include much of the necessary supporting documentation.

Abdelhamid appeared at her EUO with her public adjuster, but not an attorney. During her EUO, Abdelhamid repeatedly refused to answer any questions about her business or personal finances. She asserted her refusals to answer were based on legal advice that the questions were not reasonably related to her claims.  FIE’s counsel specifically cautioned Abdelhamid that her refusals to answer could constitute a basis for FIE to deny the claim.

Ultimately, FIE denied Abdelhamid’s claim because of her: (1) failure to produce requested documentation; (2) failure to answer material questions when examined under oath; (3) failure to submit a completed proof of loss with necessary documentation; and (4) general failure to cooperate in the processing of her claim. Although FIE denied the claim, FIE offered to consider any additional information or documentation Abdelhamid might submit in the future.

After FIE denied the claim, Abdelhamid submitted a proof of loss form and some (but not all) of the documents FIE previously had requested. Upon receipt of this new information, FIE sought to conduct a second EUO, but Abdelhamid did not respond to this request and, instead, filed suit for breach of contract and bad faith.

The trial court granted summary judgment in favor of FIE on the grounds that Abdelhamid had not complied with the conditions of the policy. Abdelhamid appealed.

Holding

The Court of Appeal affirmed the summary judgment, holding that Abdelhamid’s purported reliance on advice of counsel in refusing to answer FIE’s questions and failing to supply requested documentation did not excuse her failure to comply with the policy conditions. In addition, the Court held that the proof of loss forms that Abdelhamid submitted were incomplete and lacked all necessary supporting documentation.

The Court concluded that FIE was substantially prejudiced by Abdelhamid’s failure to produce documentation, failure to answer material questions at the examination under oath, failure to submit a complete proof of loss with supporting documentation, and general refusal to cooperate. These material breaches of the policy conditions precluded coverage for Abdelhamid’s contract claim which, in turn, defeated her bad faith claim.

Comment

This case is another in a growing body of cases in which California appellate courts have firmly held that a first-party insurer can deny coverage to an insured that does not reasonably cooperate in the investigation of the claim. The Court provided a detailed explanation of the circumstantial evidence that suggested the insured was responsible for the arson. Based on this circumstantial evidence, the Court concluded that the insurer was entitled to conduct a detailed investigation into the insured’s background, including her finances.

An insurer that intends to require the insured to submit a proof of loss form should bear in mind several points. First, the Fair Claims Settlement Practices Regulations require that an insurer provide necessary claim forms within fifteen days after receiving notice of the claim. Second, Insurance Code section 554 provides that, if an insured fails to submit a proof loss within the time required, the insurer must object “promptly and specifically” or will waive the defense.

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Defending Under One Policy Does Not Insulate Insurer from Liability for Alleged Breach of Duty to Defend / Settle Under Second Policy

When an insured has two policies through the same insurer, providing a defense under one policy does not insulate the insurer from liability for its alleged breach of the duty to defend and settle under a second policy. (Risely v. Interinsurance Exchange of the Automobile Club (2010) 183 Cal.App.4th 196)

Facts

Sean Turner gave Lisa Risely a ride in his car and then allegedly began to drive erratically and negligently. Risely allegedly asked Turner to stop and to immediately take her home, but Turner refused. An accident occurred in which Risely suffered severe injuries. Risely sued Turner for motor vehicle negligence, negligence per se and false imprisonment.

At the time of the incident, Turner was insured under an automobile policy and a homeowners policy, both issued by the Interinsurance Exchange of the Automobile Club (Exchange). The automobile policy had limits of $50,000 but did not provide coverage for personal injury arising from false imprisonment. The homeowners policy had limits of $300,000 and did provide coverage for personal injury arising from false imprisonment. 

The Exchange defended Turner under the automobile policy but did not defend him under the homeowners policy. The Exchange rejected an offer to settle the claim for $300,000 on the ground that it was in excess of the policy limits of the automobile policy and that there was no other applicable coverage.

Risely and Turner then stipulated to a judgment of $434,000 on Risely’s false imprisonment claim against Turner. As part of this arrangement, Risely received an assignment of all claims Turner might have against the Exchange. Risely then sued the Exchange for alleged bad faith arising from the Exchange’s refusal under the homeowners policy to defend and indemnify Turner against Risely’s false imprisonment claim.

The trial court granted summary judgment in favor of the Exchange and held that the Exchange could not be bound by Turner’s and Risely‘s agreement to settle. The trial court reasoned that because the Exchange provided Turner with a complete defense to Risely’s lawsuit under the automobile policy, it fulfilled its contractual obligation to provide a defense and the failure to defend under the homeowners policy was of “no consequence” to the insured, Turner. The trial court further held that when an insurer provides a complete defense to an insured, a settlement of an action by the insured without the consent of the insurer is insufficient to impose liability on the insurer in a later action against the insurer. Risely appealed.

Holding

The Court of Appeal reversed the summary judgment. According to the appellate court, “the mere fact that the insurer provided its insured with a defense under one policy does not necessarily insulate the insurer from liability for its alleged breach of the duty to defend and settle under a second policy." The court reasoned that the Exchange’s refusal to defend Turner under the homeowners policy "... potentially increased the insured's [Turner’s] exposure to personal liability." Therefore, the Exchange had not established as a matter of law that Risely could not show damages.

Comment

Under Wint v. Fidelity & Casualty Co. (1973) 9 Cal. 3d 257, where a non-defending insurer’s failure to provide a defense potentially increases the insured’s exposure to personal liability, the insured can demonstrate damages from an alleged breach of the duty to defend, notwithstanding that another insurer assumed the costs of providing a defense. In the present case, the appellate court acknowledged that there is no reported decision dealing with a single insurer’s breach of its duty to defend under one of two policies. However, despite the fact that Wint dealt with two different insurers, the court in this case found no reason why the law should differ depending on whether the policies are issued by one insurer or multiple insurers.

Note that in this case, there has not yet been any determination regarding whether the homeowners policy actually covered Turner’s alleged liability to Risely. If the homeowners policy did not in fact cover Turner’s alleged liability to Risely, then presumably the Exchange would face no liability for failing to defend and settle under the homeowners policy.

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Even If Insured Business Was Operating at Net Loss Greater than Operating Costs at Time of Loss, Business Interruption Benefits for Continuing Normal Operating Expenses Are Not Reduced by Net Loss

Interpreting a policy that provided business interruption coverage for net income “and” continuing normal operating expenses, the California Court of Appeal has held that even if the insured was operating at a net loss, the insured is still entitled to its operating expenses, which are not offset by the net loss. (Amerigraphics, Inc. v. Mercury Cas. Co. (2010) 182 Cal.App.4th 1538)

Facts

Amerigraphics, Inc. (“Amerigraphics”) is a printing and graphics design company.  Although it was financially successful until September 11, 2001, its business fell off sharply in 2002. In 2003, its premises were completely flooded, causing damage to all its equipment and forcing Amerigraphics to temporarily relocate. 

Amerigraphics submitted a claim to its business personal property insurer, Mercury Casualty Company (“Mercury”). Amerigraphics’ policy with Mercury included business interruption coverage, whereby Mercury agreed to pay for Amerigraphics’ lost “business income” during the “period of restoration.”  The policy defined “business income” as “(i) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred …; and (ii) Continuing normal operating expenses incurred, including payroll.” Mercury denied Amerigraphics’ business interruption claim on the grounds that Amerigraphics’ projected expenses exceeded its projected income, resulting in a projected net loss.

Amerigraphics sued Mercury for breach of contract and bad faith and sought a judicial interpretation of the policy’s business interruption provision. The trial court held that Amerigraphics was entitled to recover both its net income and its continuing operating expenses, without having to offset one against the other. Mercury appealed.

Holding

The Court of Appeal affirmed. It first noted that the word “and” used between subparts (i) and (ii) of the policy’s definition of “business income” indicates that Mercury must pay its insured for lost income in addition to continuing normal business expenses.  Thus, to the extent there is no lost income (i.e., when there is a net loss), the amount paid under subpart (i) would be zero, but the insured would still be entitled to its operating expenses under subpart (ii).

Mercury argued that the word “and” is the equivalent of the mathematical operator “plus.” Under Mercury’s interpretation, if the insured was operating at net loss (i.e., a negative number) greater than its operating expenses, the insured would be paid nothing. The Court of Appeal rejected this interpretation because the policy does not use the words “plus,” “offset,” “subtract,” “minus,” or the like. According to the Court, the plain language of the policy does not support subtracting the net loss from the operating expenses. Instead, the insured is entitled to its operating expenses (a positive number), in addition to its net income (which would be zero if the insured was operating at a loss).

Mercury contended that this interpretation would read the “Net … Loss” language out of the policy’s definition of “business income.” The Court rejected this argument, noting that in the event of a net loss, the insured’s entitlement to benefits of “net income” is zero, thus taking into account the phrase “Net … Loss.” 

The Court further noted that even if Mercury’s interpretation were reasonable, an ambiguity would exist, and that ambiguity would have to be resolved in the sense the insurer believed the insured understood the policy when the contract was made. Given the language of the provision, it would be objectively reasonable for the insured to believe the policy covered both its lost income stream and the costs of ongoing expenses, since those problems are to be expected following a loss and are mentioned in the policy language. Thus, any ambiguity would be resolved in favor of the insured.

Finally, the Court noted that a business should not have to be concerned that poor performance for one or two years prior to a covered loss will eliminate coverage under a business interruption provision. Such would make it pointless for the business to purchase the additional coverage.

Comment

Considering that this case involved an issue of first impression in California, that it dealt with policy language common to most business interruption policies, and that a number of insured businesses are likely operating at net losses as a result of the economic recession, this decision could have significant pro-insured consequences for business interruption claims made in California over the months and years to come.

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Subhaulers Are Not "Insureds" Under Trucker’s Commercial Auto Policy Providing "Hired Auto" Coverage

Two sub-haulers were not “insureds” under a trucker’s commercial auto policy which covered persons from whom the trucker had “hired” or “borrowed” a covered auto. (American International Underwriters Insurance Company, Inc. v. American Guarantee & Liability Insurance Company (2010) 181 Cal.App.4th 616)

Facts

American Guarantee & Liability Insurance Company (“American”) issued a Commercial Auto Policy with a Truckers Coverage Form to Denbeste Transportation (“Denbeste”). The policy defined an “insured” so as to include “the owner or anyone else from whom you [Denbeste] hire or borrow a covered ‘auto’ that is a ‘trailer’ ….”

Denbeste entered into a contract with Double D Transportation Company (“Double D”) whereby Double D agreed to haul soil from a construction site. Double D had a separate subhaul agreement with James Camara. Both Double D and Camara were acting as independent contractors. Camara drove his own tractor connected to a Double D trailer from the construction site and ran over Christopher Torgerson, severely injuring him. Torgerson sued Camara, Double D, Denbeste and others for negligence.

Double D’s insurer, American International Underwriters Insurance Company (“AIU”), and Denbeste’s insurer, American, each contributed $1.45 million toward settlement of Torgerson’s suit, and then sought indemnification from each other. American argued that it had no duty to contribute because Double D and Camara did not qualify as “insureds” on American’s policy. AIU argued that Double D and Camara were “insureds” under the American policy, and that AIU’s policy was excess to American’s policy.

On cross-motions for summary judgment, the trial court granted AIU's motion and denied American's motion. The court found Double D and Camara were persons from whom Denbeste had “hired” a covered auto as a trailer; that Double D and Camara were thus “insureds” under Denbeste’s policy through American; and that AIU’s policy was excess to American’s. Judgment was entered in favor of AIU. American appealed.

Holding

The Court of Appeal reversed. It held that Camara and Double D were not persons from whom Denbeste had “hired” or “borrowed” the vehicles involved in the accident.  Therefore, neither Camara and Double D were “insureds” under Denbeste’s policy through American.

The Court cited Civil Code § 1925, which defines “hiring” as synonymous with renting. The chief characteristic of a renting or leasing is the giving up of possession to the hirer so that the hirer and not the owner uses and controls the rented property. The Court held that the agreement between Denbeste and Double D provided for the hauling of property and not the renting of trucks and trailers. Denbeste engaged the transportation services of Double D as an independent contractor, without assuming possession or control over Double D's trailer or Camara's tractor. Denbeste therefore did not “hire” the tractor and trailer involved in the accident.

The Court also found that Denbeste did not “borrow” the trailer or tractor, as it held that the term “borrow” also connoted the right to exercise dominion and control.

The Court concluded that Camara and Double D were not persons “from whom [Denbeste] hired a covered auto that was a trailer,” and thus Camara and Double D were not “insureds” on the American policy. The Court also held that its decision was dispositive as to American’s cross-motion for summary judgment. Hence, it reversed the trial court ruling with directions to deny the AIU’s motion and to grant the American motion.

Comment

This case suggests that absent specific policy language to the contrary, courts will interpret the terms “hire” and “borrow” in commercial auto or truckers policies to require possession or control. This could reduce the number of parties beyond the named insured that are entitled to coverage under such policies.

This case also highlights the need to review the insured’s sub-haul agreement to fully evaluate coverage. The Court’s ruling here turned on its evaluation of the subhaul agreement, which evidenced Denbeste’s lack of control over the sub-haulers’ vehicles.

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